David Dodge says Canadians need to save more for retirement - or at least have realistic expectations about their lifestyles if they don't.
In a new report for the C.D. Howe Institute, the former governor of the Bank of Canada says workers need to save between 10 and 21 per cent of their pretax incomes annually, starting at age 30, if they want to retire comfortably.
Some people may feel they cannot set aside that much money, Mr. Dodge said, especially during high-cost years when they are raising children. But he said the report is intended as a "reality check" about the outcomes when people spend rather than save.
"You make a tradeoff about what's more important - retiring later or curbing my expenses today," he said in an interview.
"Or it's understanding that when I retire it's going to be more sitting on the porch in the rocking chair ... than flying off to Cancun or Whistler for holidays."
Mr. Dodge and co-authors Alexandre Laurin and Colin Busby tackled the retirement topic because they concluded many Canadians are unaware of the savings they need or think they're putting aside enough when they are not.
They said public debate about retirement in Canada has focused on reforming rules for corporate pension plans and on the possibility of creating a new national pension scheme. Mr. Dodge said there's been little talk about a more fundamental lack of savings - including inadequate contributions to companies' group registered retirement savings plans (RRSPs) and defined contribution pension plans.
"A better mechanism will help you, but you still have to put aside a lot of current earnings if you want a high-income replacement rate in retirement," he said.
He said the report should also be a wake-up call for employers who do not offer a pension plan to workers. They may find a growing number of workers are reluctant to retire because they cannot afford to live comfortably. And with mandatory retirement ages being abolished, it could be difficult to force them to go.
"Employers have said, 'Oh well, too bad, so sad, that's the individual's problem and we won't worry about that,' " he said. "But then somebody comes along and their ability to perform is declining as they get into their sixties, and they're going to want to stay on. That may cause some very real difficulties."
The report assumes employees want to have income in retirement equal to 70 per cent of their preretirement income. Mr. Dodge said a 70-per-cent replacement rate is a "gold standard" and many people may be satisfied with a "silver or bronze standard." The report also calculates savings required for a 60-per-cent replacement rate.
The report says, for example, that people who earn $61,270 a year must save 14 per cent of their annual income - consistently from age 30 - to have a 70-per-cent income replacement rate in retirement at 65.
People who earn $150,000 a year need to save 21 per cent of annual income to retire with income equal to 70 per cent of their wages. Such a savings level is not permitted under current RRSP rules, but Mr. Dodge said the threshold should be expanded.